PepsiCo, Inc. (PEP) or The Coca-Cola Co (KO), Which Stock Should You Prefer?

As far as the beverage companies are concerned, the two top companies are undoubtedly The Coca-Cola Co (NYSE:KO) and PepsiCo, Inc. (NYSE:PEP). They are the two top brands not only in the United States but throughout the world. If the stocks are looked at individually, both are good bets mainly because of their consistent performance over the years and changing their focus in line with the consumers’ latest thinking. The companies are also well managed and rarely their earnings miss the street expectations. When it comes to providing an outlook, both are cautious in offering any guidance, though they deliver better results. However, when both the companies are compared, there has to be only one company that should be better than the other. Which one is better? Let’s look at some of the comparable data before reaching a conclusion.

Top & Bottom Line

For any company, the top line and the bottom line are the key parameters. Let’s look at the last nine years revenue and earnings for The Coca-Cola Co (NYSE:KO) and PepsiCo, Inc. (NYSE:PEP). For the year ended 2005, Coca-Cola had revenues of $23.1 billion. That has grown to $46 billion at the end of the year 2014. That meant a compound annual growth pace of 8% a year. Similarly, Pepsi had revenue of about $32.6 billion at the end of the year 2005. That witnessed more than doubling to $66.7 billion by the end of the year 2014, representing a CAGR of 8.3%. It is quite clear as to who is the winner during the period.

Similarly, The Coca-Cola Co (NYSE:KO)’s profit was $5.2 billion in 2005. That has increased to $9.1 billion in 2014. That indicated a CAGR of 6.4%. PepsiCo, Inc. (NYSE:PEP)’s profit during the same period grew to $6.5 billion at the end of the year 2014, from $4.6 billion in 2005 with CAGR of 4%. When it comes to profitability, the winner is undoubtedly Coca-Cola. The primary reason for that was the strong profit margin of 22.5% in 2005 by Coca-Cola, whereas Pepsi had 14.1%. However, both of them faced margin compression during the nine-year period. Yet, Coke managed to retain a profit margin of 19.8% at the end of the year 2014 while its rival’s profit margin dropped to 9.8%. While top line is a key parameter, it is the profitability and its growth that ultimately mattered to investors. On that parameter, The Coca-Cola Co (NYSE:KO) stands out.

Dividend And EPS

Share repurchase and dividend are the two ways to return capital to investors. Here also, both are having a neck-to-neck race. For instance, Coke’s outstanding shares dipped to 4.37 billion from 4.74 billion, while PepsiCo, Inc. (NYSE:PEP)’s outstanding shares fell to 1.49 billion from 1.66 billion. That represented 0.9% fall on an annualized basis for the Coke compared to 1.2% drop for Pepsi. However, in terms of number of shares repurchased The Coca-Cola Co (NYSE:KO)’s buyback is more than double, i.e. 0.37 billion shares were bought back, compared to 0.17 billion shares repurchased by its rival. Still, Coke’s EPS growth pace was 7.2% compared to 5.3% of its competitor.

As far as the dividend is concerned, Coke is paying a dividend since 1893. For 52 straight years, the company has been boosting its dividend rate, which is a phenomenal one. The dividend yield worked out to 3.40%, which is higher than the 2.8% five-year average dividend yield. Its dividend payout ratio increased to 74% from the five-year average payout ratio of 47.0%. In the last five-year period, the average dividend growth rate was 8.4%.

On the other hand, PepsiCo, Inc. (NYSE:PEP) too had a strong track record. However, it is slightly slower than its rival. The company has been paying a dividend since 1952 and boosted the dividend rate for 43 straight years. Its dividend yield is 3.1%, which was higher than the 2.8% of the five-year average yield. Its latest dividend payout ratio is 62.0% compared to 54.0% for the average five-year period. Its dividend growth rate for the five-year period was 7.5%. Here again, The Coca-Cola Co (NYSE:KO) is a winner.

Analysts Ratings

In the last few months, Coke seems to have attracted the attention of the analysts more than Pepsi. For instance, BMO Capital upgraded shares of Coca-Cola to Outperform from Market Perform in June. Similarly, UBS also upgraded the company’s shares to a rating of Buy from Neutral in July. Both the brokerages have a price objective of $48 for the company’s shares. In August, Barclays reinstated its Equal-weight rating with a price tag of $45.

On the other hand, Susquehanna has maintained its positive rating on PepsiCo, Inc. (NYSE:PEP) shares in May with a price tag of $116. However, the same brokerage downgraded the shares to a Neutral rating in July. Jefferies maintained its Buy rating in July and a price objective of $109.

Valuation

During the nine-year comparison period, The Coca-Cola Co (NYSE:KO)’s profit earnings ratio was 18 times its earnings and grew to 21 times its earnings at the end of the year 2014. During the same period, Pepsi maintained the 22 times its earnings at the end of the last year. Though it is slightly lower, Coke was able to achieve some improvements, which was important. As a result, its EPS growth pace translated into 8.6% in 2014, compared to 7.2% in 2005. As far as PepsiCo, Inc. (NYSE:PEP), EPS translated into 5.4% from 5.3% only during the same period.

Conclusion

Except the top line growth, Pepsi is way behind The Coca-Cola Co (NYSE:KO) on a number of parameters that matter while investing. Coke’s total returns are 10.7% compared to PepsiCo, Inc. (NYSE:PEP)’s 7.3%. While there is no doubt that both are good companies, there is no denying the fact that Coke is a clear winner when compared with Pepsi.

Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Viraj Shah has completed M.Com (Finance) and is currently pursuing his CFP. He tracks US markets along with other global markets like India very closely. He is very passionate about stocks, real estate, and technology. He also believes that money can always be made in the market.